This morning we received the last inflation report before the Bank of Canada interest rate decision next week (October 23). And in our view, it supports a 50-basis point cut.

Softer headline - Consumer prices rose 1.6% year-over-year (y/y) in September, down from August’s 2% reading.* That’s better than the consensus of 1.8% and the lowest since February 2021.

Beyond the pump - Lower gasoline prices played a big part last month, falling 10.7% from the same time last year. But the cooling of headline inflation in recent months is broader than that, with meaningful progress on shelter. See below.

It’s trending…lower - Core readings of inflation, which attempt to capture underlying trends, are moving in the right direction. Two key measures (trim and median) rose at a slower rate of 2.1% on a 3-month moving average basis.** The year-over-year changes of these measures were more sticky holding at an average of 2.35%.

Shelter - Packing less inflation punch - What’s left in price pressures is mostly coming from shelter. But even shelter costs are growing at a slower rate of 5.0% y/y—a 16 month low. The Consumer Price Index (CPI) excluding shelter costs grew only 0.4 y/y. Excluding mortgage costs, the CPI was up 1.0% y/y—the smallest increase since December 2020. Mortgage interest costs are still rising quickly (+17% y/y), but that’s from a peak of 31% in the summer of 2023. This measure is heavily influenced by monetary policy, and will continue to ease as the Bank cuts.

Food - Still expensive - Food is an example of something that is much more expensive than before (up nearly 23% since January 2021) and continues to rise faster than overall prices. While not the same inflation driver as before, food prices were up 2.8% y/y last month.

Implications

For a Bank of Canada that has turned more dovish and now concerned about downside risks, our view is that today’s consumer price reading supports a 50-basis point cut in October.

Inflation has held in the 1% to 3% control range since January, the headline is now below 2%, and inflation expectations are easing.

Some may point to last week’s stronger-than-expected jobs report as a reason to move slower with a 25-basis point cut cut. But with inflation falling and the economy running at excess capacity, we don’t see why the Bank shouldn’t move faster to its neutral rate. Our forecast has the Bank cutting to 2.75% by mid next year.

Alberta’s inflation rate declines slightly

Alberta’s annual inflation rate also fell last month, hitting a 16-month low of 1.9%.

The story again was falling energy costs (-10.7% y/y), particularly for electricity but also natural gas and gasoline prices.

Electricity prices fell 36% y/y. Recall the summer of 2023, when electricity prices spiked amid strong demand and constrained supply. Electricity rates have since fallen with new capacity coming online.

Rental accommodation costs remain the major inflation driver, up 11.2% y/y. That’s higher than the 8.0% increase nationally.

The breakdown for the two largest centers in Alberta shows Calgary’s inflation rate at 2.1% vs. 1.8% in Edmonton last month, with Calgary recording faster growth in owned accommodation costs.

Excluding energy and food prices, Alberta’s core inflation rate was 2.9% vs. 2.4% nationally.

*The inflation rate is the year-over-year percent change in the unadjusted monthly Consumer Price Index.

**Month-over-month changes in the 3-month moving average, annualized.

Answer to the previous trivia question: The first brewery in what would later become the province of Alberta was founded in 1882.

Today’s trivia question: Which province had the highest inflation rate last month?